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Testing Optimal Punishment Mechanisms under Price Regulation: the Case of the Retail Market for Gasoline

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  • Robert Gagné

    ()
    (IEA, HEC Montréal)

  • Simon van Norden

    ()
    (IEA, HEC Montréal)

  • Bruno Versaevel

Abstract

We analyse the effects of a price floor on price wars (or deep price cuts) in the retail market for gasoline. Bertrand supergame oligopoly models predict that price wars should last longer in the presence of price floors. In 1996, the introduction of a price floor in the Quebec retail market for gasoline serves as a natural experiment with which to test this prediction. We use a Markov Switching Model with two latent states to simultaneously identify the periods of price-collusion/price-war and estimate the parameters characterizing each state. Results support the prediction that price floors reduce the intensity of price wars but increase their expected duration.

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Bibliographic Info

Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number 06-12.

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Length: 29 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:iea:carech:0612

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Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7
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Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7
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Keywords: price regulation; oligopoly supergame; Markov switching model; gasoline;

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References

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Citations

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Cited by:
  1. Billette de Villemeur, Etienne & Flochel, Laurent & Versaevel, Bruno, 2012. "Optimal collusion with limited liability," MPRA Paper 38481, University Library of Munich, Germany.
  2. Flochel, Laurent & Versaevel, Bruno & de Villemeur, Étienne, 2009. "Optimal Collusion with Limited Liability and Policy Implications," TSE Working Papers 09-027, Toulouse School of Economics (TSE), revised Jul 2011.
  3. Etienne Billette De Villemeur & Laurent Flochel & Bruno Versaevel, 2009. "Optimal Collusion with Limited Severity Constraint," Post-Print halshs-00375798, HAL.

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